Re: Thoughts on IR35 Contract

**Denny** · 15 February 2006, 09:20

Originally posted by rtjward

I've posted a few times on this board now, all around advice on breaking into the contract market.

Things are now progressing and I've now got agents on the phone to me every other day discussing potential roles.

Most recently, it looks like I will be receiving an interview for one particular role which is positive news. Upon speaking with the agent (one of the largest agencies) they said that the contract would be within IR35 and sent me through a copy of the contract itself asking me to confirm that I would be happy to sign it.

Although being caught by IR35 isn't ideal with regards to 'take-home', I'm not sure I should/can be arguing the toss baring in mind this would be my first contract. A couple of questions I have around this are:

1 - Should I just go along with this contract to get a foot on the ladder and learn the ropes i.e. it would be my first contract role, or should I argue the toss?

2 - Do I have any grounds to argue the toss in the first place?

3 - Baring in mind this is caught by IR35 and will therefore take a considerable amount of tax away from my revenue, should I not be looking to go umbrella? I read one of the earlier posts regarding 'Helpful advice' which basically said that you should always go Ltd. but I'm struggling to see the benefits in this case when my monthly take home would be reduced by £1000.

Any advice appreciated.

I said that limited was the best way to go if you pull in a big enough fee income per year. If you are new to this game then umbrella would be better for you, bearing in mind that some will encourage you to claim some dispensations without supporting receipts. A safe one like Parasol may be your best option but you will still only pull in about half of your fee income from day one with the rest taken automatically at at 40 per cent tax and employee/employer NI and their admin fee (which isn't too much). This is a considerable amount to have deducted but, bear in mind, that you can reclaim any back tax from the Revenue on your next tax assessment should your annual income not qualify eventually for 40% tax. Plus you'll be reimbursed for your single persons allowance like any other taxpayer. To be perfectly honest with you I struggle to see what difference it makes to use a brolly like Parasol and paying tax under IR35.

On your contract. You should get a foothold and not worry too much. I expect you'd be caught anyway if you don't qualify under the IR's criteria for exemption for running a 'real business.'

**malvolio** · 15 February 2006, 09:21

Going umbrella does not take you out of IR35. Since you are their employee, you pay the same tax anyway, except you usually lose more than the IR35 5% in their fees.

The other alternative is a composite, where you are a sort of employee but not quite with a semi-fictional company administered by someone else in which you hold one share and get dividends from. Since this is clear tax avoidance, it will be closed down at some point since Gordon has decreed legal tax avoidance is in fact no longer acceptable.

Even inside IR35, your own company is better off, since you get 100% of your income as opoosed to 100% less the umbrella's cut - so you would probably net more income. And it's good practice for when you get a non-IR35 contract.

The proper appproach is to get professional advice. Bauer and Cotterel, for example, will examine the contract for you, make an informed decision on its status and negotiate any necessary changes (around £150 - set that aginst the total value of the contract). Since the parameters for IR35 are well known, there is a strong chance you will be outside anyway. Do not accept the agents' view, they are not competent to deliver an opinion. Do not sign anything you are not sure about.

Don't worry about this being the first one. The idea is to protect your interests, nobody else's.

**Denny** · 15 February 2006, 09:37

Originally posted by malvolio

Going umbrella does not take you out of IR35. Since you are their employee, you pay the same tax anyway, except you usually lose more than the IR35 5% in their fees.

The other alternative is a composite, where you are a sort of employee but not quite with a semi-fictional company administered by someone else in which you hold one share and get dividends from. Since this is clear tax avoidance, it will be closed down at some point since Gordon has decreed legal tax avoidance is in fact no longer acceptable.

Even inside IR35, your own company is better off, since you get 100% of your income as opoosed to 100% less the umbrella's cut - so you would probably net more income. And it's good practice for when you get a non-IR35 contract.

The proper appproach is to get professional advice. Bauer and Cotterel, for example, will examine the contract for you, make an informed decision on its status and negotiate any necessary changes (around £150 - set that aginst the total value of the contract). Since the parameters for IR35 are well known, there is a strong chance you will be outside anyway. Do not accept the agents' view, they are not competent to deliver an opinion. Do not sign anything you are not sure about.

Don't worry about this being the first one. The idea is to protect your interests, nobody else's.

Gordon has decreed legal tax avoidance is no longer acceptable.

No he hasn't. Legimitate tax avoidance is about putting your savings in a pension or using ISA's etc or reducing your tax burden by buying duty free and so on. The key here is that Gordo approves and endorses these methods.

Paying yourself a miniscule salary plus dividends as a freelancer, using offshore schemes and so on are now considered as methods of unacceptable tax evasion, which has always been illegal. The difficulty with some of these schemes is that some lawyers still consider them legitimate avoidance schemes if they fall into a tax 'loophole' category but Gordo is closing these 'loopholes' now and even though some of these schemes still exist any conractor who takes advantage of them, with legal advice or not, are seriously risking being considered evaders on the untaxed part of their income.

Watch 'The Firm' with Tom Cruise and Gene Hackman. There's a good question that Tax legal expert Hackman's character tests his new prodigy in a hotel room in the Cayman Islands: 'What's the difference between tax avoidance and evasion?'

The answer: whatever the IRS decides.

**paulb567** · 15 February 2006, 10:08

Originally posted by malvolio

Do not accept the agents' view, they are not competent to deliver an opinion.

When I was in the process of arranging and signing my first contract I asked the agent I was dealing with if she knew whether the contract was caught by IR35 and she replied "All our contracts are within IR35". I thought what the hell and got Bauer and Cotterel to review it and they thought it was outside IR35. I have no idea what the contract between agent and client is like though.

**Mailman** · 15 February 2006, 10:21

Bah, agents know nothinig! Always assume your contract is outside IR35 because you have more chance of winning Euro lottery than getting an IR35 review

Mailman

**expat** · 15 February 2006, 10:39

Originally posted by Denny

Paying yourself a miniscule salary plus dividends as a freelancer, using offshore schemes and so on are now considered as methods of unacceptable tax evasion, which has always been illegal.

"Illegal" in what sense? Do you mean, "contrary to specific provisions of a specific law on the statute books"? Or do you just mean "(not) acceptable" (as Malvolio put it)?

**Denny** · 15 February 2006, 10:55

Originally posted by expat

"Illegal" in what sense? Do you mean, "contrary to specific provisions of a specific law on the statute books"? Or do you just mean "(not) acceptable" (as Malvolio put it)?

I would have thought it was obvious really.

Many contractors pay themselves ridiculously low salaries and take the rest as dividend payments that only attract a 19% corporation tax or no tax if the non-salaried fees are left in the business.

The whole point of paying yourself a dividend, even if your working conditions remain outside of IR35, is because you reward yourself very occasionally for building the business up by employing people or investing in the growth of the business. That should only happen very occasionally, certainly not monthly or even quarterly is a bit suspect. Six monthly is probably acceptable with 'good reason.' It's Gordo's way of saying thank you. If you haven't done this or don't intend to build the business up because you are 'freelancing' as a one-man band and show no signs of becoming a 'real business' then the sum taken as dividend is surely undertaxed and considered tax evaded personal bounty (for no good reason). That's why you should always pay yourself a decent market-like salary depending on what your particular skills are and only pay yourself a dividend minimum every six months and then only if you know your actual on contactual working conditions are outside IR35.

If your working conditions are not likely to viewed as IR35 exempt then taking a dividend is obviously tax evasion on the payout if you would otherwise attract a higher rate of tax if you were paid via PAYE method as an employee.

**Denny** · 15 February 2006, 11:00

Originally posted by Mailman

Bah, agents know nothinig! Always assume your contract is outside IR35 because you have more chance of winning Euro lottery than getting an IR35 review

Mailman

Depending on your specialism and past working arrangements (autonomous or controlled) then you should make that choice based on 'likelihood' the next contract will support the same type of working conditions.

**ratewhore** · 15 February 2006, 11:02

Research what IR35 really means in terms of the contract clauses you need (that can be realistically added!) and your ways of working. Then, once you are on top of that you can tell the pimp to wind his neck in when he tells you if the contract is in or out...

Re: Thoughts on IR35 Contract